Forward integration

Forward integration is where the company gains control of the business activities that are ahead in the value chain of its industry, this might include among others direct distribution or supply of the company's products. It is an operational strategy implemented by a company that wants to increase control over its suppliers, manufacturers, or distributors, so it can increase its market power.

This is a type of vertical integration of the supply chain and is also known as “cutting out the middleman”. The ultimate goal of forward integration is to increase the power and ownership over the forward of their value chain.

In forward integration, the company acquires or merges with a distributor. In backward integration, the company acquires/merges with a supplier or manufacturer. The strategy eliminates various transaction and transportation costs. This subsequently results in a lower final price for the company’s product.

Example of forward integration: A FMCG goods production company acquires or starts a distribution company. Now the company can have entire control over their distribution process. Other example of forward integration would be a farmer who directly sells his crops at a local grocery store rather than to a distribution center that controls the placement of foodstuffs to various supermarkets.

An FMCG company like Britannia builds up its distribution network, including regional warehouses, to directly sell to the retailers without going via wholesalers.Forward integration helps a company extend its reach in the market, helping it get control of the demand side.
Forward integration

Backward integrations

Backward integration is a form of vertical integration involves buying part of the supply chain that occurs prior to the company's manufacturing process. This form of vertical integration can be advantageous to the primary business if control of the business that is downstream the supply chain provides a guaranteed supply of inputs.

For instance, a company might buy inventory or raw materials from its supplier. Companies often complete backward integration by purchasing or combining with these undertakings

For example, backward integration might involve the clothing manufacturer buying a textile company that produces the material for their clothing. The Company gains control over the raw material suppliers by integrating them with their ongoing business.

The company does so to maintain a competitive advantage in the business and increase entry barriers. Businesses pursue backward integration with the expectation that the process will result in cost savings, increased revenues, and improved efficiency in the production process.

Advantages of backward integration
*Improved efficiency
*Cost savings
*Gain more control of the supply network
*Synergize business operations and increase profits

Apple Inc's use of backward vertical integration has been a great success and allowed the company to advance its new products and technology at a more rapid pace.

Backward integration reduces the cost of distribution. The result is the improved competitive advantage for the company over their competitors.
Backward integrations

Vertical integration supply chain

Vertical integration is “the degree to which an organization owns the network of processes”. It means some companies, owning nearly the entire supply chain, from design and production, to distribution and logistics, to stores worldwide.

Supply chain integration involves information sharing, planning, coordinating and controlling materials, parts and finished goods at the strategic, tactical and operational levels.

The objective for this integration can involve acquiring a firm that is closer to the source of supply or to the ultimate consumer.

Vertical integration benefits companies by allowing them to control processes, reduce costs and improve efficiencies. Downstream integration plays an important role for manufacturing firms in several ways.
*First, it can help firms to secure the distribution channels of their products, especially in markets with increased uncertainties
*Second, it can offer a way to control efficiency gains and cost reductions in the supply chain
*And third, downstream markets can offer important benefits in addition to large new sources of revenue.

This type of integration involves the coordination between businesses located at different stages of the supply chain. Customer integration and supplier integration are major instances of vertical integration.

The cost of integration is a loss of flexibility in choosing the most suitable suppliers for a particular final product.
Vertical integration supply chain